NDLI: Dynamic credit investment in partially observed markets

Content Provider	Springer Nature Link
Author	Figueroa López, José E. Pascucci, Andrea Capponi, Agosti
Copyright Year	2015
Abstract	We consider the problem of maximizing the expected utility for a power investor who can allocate his wealth in a stock, a defaultable security, and a money market account. The dynamics of these security prices are governed by geometric Brownian motions modulated by a hidden continuous-time finite-state Markov chain. We reduce the partially observed stochastic control problem to a complete observation risk-sensitive control problem via the filtered regime switching probabilities. We separate the latter into predefault and postdefault dynamic optimization subproblems and obtain two coupled Hamilton–Jacobi–Bellman (HJB) partial differential equations. We prove the existence and uniqueness of a globally bounded classical solution to each HJB equation and give the corresponding verification theorem. We provide a numerical analysis showing that the investor increases his holdings in stock as the filter probability of being in high-growth regimes increases, and decreases his credit risk exposure as the filter probability of being in high default risk regimes gets larger.
Ending Page	939
Page Count	49
Starting Page	891
File Format	PDF
ISSN	09492984
e-ISSN	14321122
Journal	Finance and Stochastics
Issue Number	4
Volume Number	19
Language	English
Publisher	Springer Berlin Heidelberg
Publisher Date	2015-08-25
Publisher Place	Berlin, Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Filtering Portfolio theory Dynamic programming method Finance Economic Theory/Quantitative Economics/Mathematical Methods Probability Theory and Stochastic Processes Quantitative Finance Partial information Hidden Markov chain Risk-sensitive control Statistics for Business/Economics/Mathematical Finance/Insurance Optimal stochastic control Default risk
Content Type	Text
Resource Type	Article
Subject	Finance Statistics and Probability Statistics, Probability and Uncertainty

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